Pillar 3 Report 2014

Transcription

1 Pillar 3 Report 2014 rbs.com

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3 Pillar 3 Report 2014 Contents Page Forward-looking statements 3 Basis of disclosure 3 Key metrics 3 Regulatory framework 4 Pillar 1 - Minimum capital approaches 4 Pillar 2 - Supervisory review process 5 Pillar 3 - Market discipline 5 Regulatory and statutory consolidation 5 Risk governance and appetite 6 Regulatory hierarchy 6 Capital 7 RBS and significant subsidiaries: RWAs and minimum capital requirements 7 Capital instruments 16 Credit risk 19 Credit risk management 19 Measurement of credit RWAs under Basel III 19 Credit risk models 19 Modelling framework (including back-testing) 20 Changes to wholesale credit risk models 20 Overview of credit risk tables 21 Definitions used in tables 21 Total credit risk 23 Non-counterparty credit risk 34 Credit risk mitigation 40 Asset quality analysis of non-counterparty credit risk exposures 42 Expected loss and impairment 57 Probability of default and exposure at default 58 Loss given default 59 Counterparty credit risk 60 Past due and impaired assets 64 Securitisation 67 Definitions 67 Objectives and roles 67 Types of risks 68 Monitoring risks 69 Regulatory treatment of securitisation 69 Calculation of risk-weighted exposures 70 Summary of accounting policies including derecognition 70 Assets awaiting securitisation 71 Implicit support 71 Securitisation and re-securitisation exposures 71 Types of transactions 71 SSPEs used by RBS 71 Appendices Appendix 1 - Transitional own funds 79 Appendix 2 - Capital instruments 82 Appendix 3 - Asset encumbrance 113 Appendix 4 - CRR roadmap 114 Glossary Acronyms 120 Key terms 121 Charts Page Chart 1: Minimum capital requirement approaches 4 Chart 2: Regulatory hierarchy 6 Chart 3: Simplified illustration of regulatory treatment of securitisation 70 1

4 Pillar 3 Report 2014 Tables Page Capital: RBS and significant subsidiaries Table 1: RBS capital and leverage ratios 7 Table 2: Capital ratios 8 Table 3: RWAs by risk type 8 Table 4: Minimum capital requirements 10 Table 5: Non-counterparty credit risk IRB minimum capital requirements 11 Table 6: Non-counterparty credit risk STD minimum capital requirements 12 Table 7: Counterparty credit risk requirements 12 Table 8: Market risk trading book and other business minimum capital requirements 13 Table 9: Capital resources 14 Table 10: Capital instruments 16 Credit risk Table 11: RWA density by sector cluster and regulatory approach 23 Table 12: Total credit risk EAD, RWAs and minimum capital requirements by sector cluster 25 Table 13: Total credit risk EAD by sector cluster, geographical region and residual maturity 27 Table 14: Credit risk EAD and RWAs by segment, regulatory approach and exposure class 28 Table 15: Credit risk EAD, RWAs and minimum capital requirements by regulatory approach and exposure class 32 Table 16: Non-counterparty credit risk EAD pre CRM by exposure class and sector cluster 34 Table 17: Non-counterparty credit risk by exposure class and geographical region 36 Table 18: Non-counterparty credit risk by exposure class and residual maturity 38 Table 19: Incorporation of credit risk mitigants within IRB risk parameters 41 Table 20: Non-counterparty credit risk exposures covered by guarantees and credit derivatives 41 Table 21: Non-counterparty credit risk exposures covered by eligible financial collateral (STD approach) 42 Table 22: IRB exposures, AQ band mapping to PD range and S&P ratings 43 Table 23: Total IRB non-counterparty credit risk exposures post CRM by AQ band 44 Table 24: Central governments and central banks IRB non-counterparty credit risk exposures post CRM by AQ band 45 Table 25: Institutions IRB non-counterparty credit risk exposures post CRM by AQ band 46 Table 26: Corporates IRB non-counterparty credit risk exposures post CRM by AQ band 47 Table 27: Corporates under the supervisory slotting approach post CRM by AQ category 48 Table 28: Retail IRB non-counterparty credit risk exposures post CRM by AQ band 50 Table 29: Equity exposures calculated using the IRB approach post CRM by AQ band 53 Table 30: Equity exposures post CRM calculated using the simple risk-weight approach 54 Table 31: STD exposures, Credit quality steps mapping to external credit gradings 55 Table 32: Total standardised non-counterparty credit risk exposure by credit quality step 55 Table 33: Expected loss and impairment charge 57 Table 34: Estimated probability of default, actual default rates and EAD outcomes versus predictions 58 Table 35: Loss outcomes versus predictions 59 Table 36: Counterparty credit risk exposures post CRM by regulatory approach, exposure calculation method and product type 60 Table 37: Counterparty credit risk EAD by AQ band under the IRB approach 61 Table 38: Netting and collateralisation impact on counterparty credit risk for OTC derivatives under the mtm method 62 Table 39: Credit derivative transactions 63 Table 40: Past due and impaired exposures and provisions by industry sector for RBS and significant subsidiaries 64 Table 41: Past due and impaired exposures and provisions by geographic area 65 Table 42: Loan impairment provisions flow statement 66 Securitisation Table 43: Securitisation positions, retained or purchased, RWAs and minimum capital requirements 72 Table 44: Securitisation positions, retained or purchased, by risk-weightings 73 Table 45: Securitisation positions, retained or purchased, by risk-weightings and underlying exposure type 74 Table 46: Securitisation positions, retained or purchased, on and off-balance sheet 75 Table 47: Securitisation positions subject to market risk capital requirements, trading book minimum capital requirements 76 Table 48: Securitisation activity by RBS during the year and recognised gain or loss on sale 77 Table 49: Securitisation positions, retained, outstanding and related past due exposures 78 2

5 Forward-looking statements This document contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to the financial condition, results of operations and business of The Royal Bank of Scotland Group plc ( RBS ). Generally, words such as may, could, will, expect, intend, estimate, anticipate, believe, plan, seek, continue, project, should, probability, risk, value-at-risk, target, goal, objective, endeavour, outlook, optimistic and prospects or similar expressions or variations on such expressions identify forward-looking statements. Any forward-looking statements set out herein represent RBS s expectations or beliefs concerning future events and involve known and unknown risks and uncertainty that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. For further risks and uncertainties faced by RBS that may impact the statements set out in this document, refer to the 2014 Annual Report and Accounts (ARA) and any other interim or updated information published by RBS. Any forward-looking statements set out herein speak only as at the date of this document. Except as required by the Prudential Regulation Authority (PRA), the London Stock Exchange or other applicable law or regulation, RBS does not have any obligation to update or revise publicly any forward-looking statements, whether as a result of new information, further events or circumstances or otherwise, and expressly disclaims any obligation to do so. Basis of disclosure The Pillar 3 disclosures made by The Royal Bank of Scotland Group plc and its consolidated subsidiaries (together RBS) are designed to comply with Capital Requirements Regulation (CRR). They should be read in conjunction with the 2014 ARA, approved by the Board on 25 February There are important differences between RBS s accounting disclosures and the disclosures required by the Capital Requirements Directive (CRD) presented in this report, summarised as follows: The disclosures in this report are presented on a regulatory, rather than an accounting basis of consolidation. Therefore, these disclosures may not be directly comparable to other external disclosures made by RBS. The definition of exposure differs between CRR and International Financial Reporting Standards (IFRS). The CRR definition used in the Pillar 3 disclosures is exposure at default rather than carrying value at the balance sheet date, as used in RBS s financial reporting which is prepared in accordance with IFRS. It is not always possible to aggregate the disclosures across the different CRR approaches to obtain a meaningful RBS view. This is particularly relevant for credit risk disclosures. The information presented in this Pillar 3 Report is not required to be, and has not been, subject to external audit. Whilst RBS has participated in discussions at the British Bankers Association and other trade bodies, it is possible that disclosures made by other banks, especially outside the UK, are not directly comparable with those in this report. RBS has not omitted any disclosures on the grounds that the information may be proprietary or confidential. Disclosures in relation to remuneration are included on pages 73 to 93 of the 2014 ARA. The disclosures in this report are based on the CRD extant at the reporting periods presented. Therefore disclosures relating to 2014 are based on CRR as promulgated by the PRA with effect from 1 January 2014; disclosures for 2013 are based on CRD III or Basel 2.5. Appendix 4 CRR roadmap provides references to disclosures in this report as well as to disclosures elsewhere, predominantly the 2014 ARA. Key metrics Key metrics for RBS are set out as follows: Strategic report section of the 2014 ARA on page 2 and 3, page 111 and page 11 for target measures. Capital and leverage ratios for RBS and capital ratios for significant subsidiaries on pages 7 and 8. 3

6 Regulatory framework Components The Basel III framework was implemented in the European Union (EU) through the CRD. The framework is based on three Pillars: Pillar 1 - Minimum capital requirement: defines rules for the calculation of credit, market and operational risk; Pillar 2 - Supervisory review process: requires banks to undertake an internal capital adequacy assessment process for risks not included in Pillar 1; and Banks are required to disclose their material risks as part of the Pillar 3 framework. Most of these requirements have already been satisfied within the 2014 ARA, available on RBS's website (rbs.com). The 2014 ARA includes a range of risk factors and provides in-depth analysis on the specific risks to which RBS is exposed. These Pillar 3 disclosures provide additional information over and above that contained in the 2014 ARA. Pillar 3 - Market discipline: requires disclosures to allow investors and other market participants to understand the risk profiles of individual banks. Pillar 1 - Minimum capital approaches CRR requires risk-weighted assets (RWAs) to be calculated for credit, market and operational risks with various approaches available to banks, with differing levels of sophistication. The minimum capital requirement is calculated as 8% of RWAs. Chart 1: Minimum capital requirement approaches Minimum capital approaches Credit risk Market risk Operational risk Retail - Standardised - Retail IRB Non-retail - Standardised - Foundation IRB - Advanced IRB Counterparty credit risk - Mark-to-market - IMM - Standardised Asset securitisation - RBA - IAA - Supervisory formula - Standardised - IMM - Basic indicator - Standardised - Advanced measurement approaches For credit risk, the majority of RBS uses the internal ratings based (IRB) approach for calculating credit risk RWAs. The standardised approach is used for exposures in certain portfolios. For counterparty credit risk RBS use both mark-to-market method and internal models method (IMM). Securitisation RWAs are calculated based on the ratings based approach (RBA) generally and internal assessment approach (IAA) for asset-backed commercial paper conduit programmes. RBS uses both standardised approach and IMM for calculating market risk RWAs. Refer to pages 298 to 322 of the 2014 ARA for market risk disclosures, including minimum capital requirements and non-traded interest rate, currency and equity risks. For operational risk, RBS uses the standardised approach to calculate RWAs based on gross income. Refer to pages 187 to 190 of the 2014 ARA for operational risk disclosures. 4

7 Regulatory framework Pillar 2 - Supervisory review process Pillar 2 comprises RBS s internal capital adequacy assessment process (ICAAP) and a supervisory review and evaluation process undertaken on an annual basis and focusing on the amounts, types and distribution of capital which RBS considers adequate to cover the risks it is or may be exposed to. The ICAAP evaluates capital requirements for major sources of risk over the short and long term: Pillar 2A comprises risks which are not captured in Pillar 1 (such as non-traded interest rate risk and structural foreign exchange risk) or not adequately captured in Pillar 1 (such as credit concentration risk); and Pillar 2B incorporates stress testing and scenario analysis, which serve as a basis for a forward-looking assessment of RBS s capital requirements in stress and any resultant stress capital buffers. RBS undertakes a risk assessment to ensure all material risks are identified, adequately managed and capitalised where appropriate. Within Pillar 2A, RBS assesses credit concentration risk, certain aspects of traded market risk that are not fully captured in Pillar 1, non-traded interest rate risk (NTIRR), pension risk and operational risk to compensate for shortcomings of the Pillar 1 standardised approach. RBS uses economic capital models to estimate Pillar 2A capital charges for credit concentration and operational risk. A description of economic capital is provided on page 204 of the 2014 ARA. Information regarding specific credit risk concentrations, such as sector or geography, is included within Pillar 3. Refer to pages 316 to 319 of the 2014 ARA for more information on NTIRR and pages 331 and 332 for pension risk. Pillar 2B is based on stress testing and scenario analysis. It is used to assess the quantum and quality of capital required to be set aside to counteract the adverse impact of a severe but plausible stress on RBS s capital, and to ensure capital levels in stress remain above minimum requirements. The ICAAP is approved by the Board before it is submitted to the regulator and forms the basis of the supervisory review and the setting of the Individual Capital Guidance by the PRA. Refer to page 202 of the 2014 ARA for details. Pillar 3 - Market discipline RBS is committed to delivering best practice risk and capital disclosures, to ensure that stakeholders understand the risks within RBS. The Pillar 3 disclosures are designed to encourage and promote market transparency and stability. It represents a component of RBS's broader disclosures framework. Internal Audit undertook an annual review to provide management and the Board with assurance relating to the adequacy and effectiveness of the controls over the production of the Pillar 3 disclosures. RBS publishes its Pillar 3 disclosures on an annual basis as required by the CRD. Certain of RBS s subsidiaries in Europe publish capital and RWA data externally through an appropriate mechanism (such as websites and annual reporting statements), thereby satisfying the European Banking Authority requirements for disclosures in the member states. Outside the EU, local subsidiaries may make additional disclosures under Pillar 3, as required by their local regulators. RBS continues to participate in the British Bankers Association s drive towards consistent Pillar 3 disclosures for UK banks wherever possible. Footnotes are included with the data tables to ensure transparency regarding the approaches used for the disclosures. At EU and global levels, different definitions and assumptions adopted by other banks can make direct comparison difficult. Regulatory and statutory consolidation Scope of application The Royal Bank of Scotland Group plc is the parent undertaking for all authorised firms in the Group and is subject to consolidated supervision by the PRA. The Pillar 3 disclosures have been prepared for RBS in accordance with CRR of the PRA Handbook. Control Inclusion of an entity in the statutory consolidation is driven by RBS s ability to exercise control over that entity. The regulatory consolidation applies a comparable test but consolidation is restricted to certain categories of entities. In accordance with PRA rules, non-financial and certain structured entities are excluded from the regulatory consolidation. Significant influence or joint control Where RBS does not have control of an entity but has more than 20% of the voting rights or capital of that entity, then it must be included in the regulatory consolidation on a pro-rata basis, unless it falls into one of the excluded categories or RBS has agreed a different treatment with the PRA (by obtaining permission). Such entities will only be included in the statutory consolidation on a pro-rata basis where RBS has joint control. Entities where RBS has significant influence will be equity accounted in the statutory consolidation. 5

8 Regulatory framework Solo-consolidation, impediments to the transfer of capital resources and aggregate capital deficiency Individual firms within RBS apply the provisions in CRR (soloconsolidation permission) in a limited number of cases only. In 2014, The Royal Bank of Scotland plc (RBS plc) had no soloconsolidated subsidiaries whilst National Westminster Bank Plc had two solo-consolidated subsidiaries, together NWB Plc in this report. Permission is only used where the business of the entity is an extension of the parent bank s activities undertaken for commercial reasons and solo-consolidation is required to ensure that there are no adverse consequences to the capital ratios. RBS operates on an integrated basis with all RBS companies being subject to policies, governance and controls that are set centrally. Aside from regulatory requirements, there are no current or foreseen material, practical or legal impediments to the transfer of capital or prompt repayments of liabilities when due. There were no capital deficiencies (defined as the amount where the actual capital resources are less than the required minimum) in respect of subsidiaries not included in RBS consolidation. Risk governance and appetite RBS is committed to the highest standards of corporate governance in every aspect of the business, including risk management. For further information refer to pages 176 to 179 of the 2014 ARA. Risk appetite is an expression of the level of risk that RBS is prepared to accept in order to deliver its business objectives. For further information refer to pages 180 to 183 of the 2014 ARA. Regulatory hierarchy Chart 2 represents a simplified regulatory hierarchy of RBS, specifically highlighting those subsidiaries and regions which are of significance. RBS has considered the CRR requirements for significant subsidiaries: entities whose total RWAs are 5% or more of RBS RWAs are deemed significant subsidiaries for Pillar 3 disclosure purpose. These entities at 31 December 2014 are: RBS plc, NWB Plc, Ulster Bank Ireland Limited (UBIL), and Citizens Financial Group, Inc (CFG). Chart 2: Regulatory hierarchy The Royal Bank of Scotland Group plc Consolidated RBS plc Other entities NWB Plc Other entities CFG. V. (..) Other entities UBIL Significant subsidiaries Shown for completeness, includes deconsolidated subsidiaries 6

9 Capital RBS and significant subsidiaries It is RBS s policy to maintain a strong capital base and to utilise it efficiently throughout its activities to support strategic objectives and ultimately optimise to shareholders returns, while maintaining a prudent relationship between the capital base and the underlying risks of the business. In carrying out this policy, RBS follows the regulatory requirements of the twin peaks regulatory structure in the UK under the supervision of the FCA and the PRA, also having regard to other regulators, rating agencies, its peer group and market expectations. Capital allocation Capital resources are allocated to RBS s businesses based on key performance parameters agreed by the Board in the annual strategic planning process. Principal among these is a profitability metric, which assesses the effective use of the capital allocated to the business. Projected and actual return on equity is assessed against strategic objectives. The allocations also reflect strategic priorities, the intensity of regulatory capital use and the usage of other key resources such as balance sheet liquidity and funding. The PRA uses the risk asset ratio (RAR) as one of the measures of capital adequacy in the UK banking sector, comparing a bank s capital resources with its RWAs (the assets and off-balance sheet exposures are weighted to reflect the inherent credit and other risks). By international agreement, the RAR should be not less than 8% with a Tier 1 component of not less than 4%. Table 1: RBS capital and leverage ratios Capital, RWAs and risk asset ratios, on the basis of transitional rules and end-point CRR, calculated in accordance with PRA definitions, are set out below PRA Estimated PRA End-point transitional end-point transitional Basel CRR basis (1) basis CRR basis (1) basis (2) 2.5 basis Capital bn bn bn bn bn CET1 (3) Tier Total RWAs Credit risk - non-counterparty counterparty Market risk Operational risk Risk asset ratios % % % % % CET1 (3) Tier Total Leverage ratio (2) Tier 1 capital 39.9bn 36.8bn Exposure 939.5bn 1,082.0bn Leverage ratio (4) 4.2% 3.4% Notes: (1) CRR as implemented by the PRA in the UK, with effect from 1 January (2) Estimated. (3) Common Equity Tier 1 (CET1) ratio with effect from 1 January (4) Based on end-point CRR Tier 1 capital and revised 2014 Basel III leverage ratio framework. Key points RBS RWAs increased from 385 billion on a Basel 2.5 basis to 429 billion on the CRR basis principally reflecting: 1,250% risk weighting of securitisation positions, previously capital deductions; Impact of credit valuation adjustment and asset valuation correlation relating to banks and central counterparty; Implementation of CRR model suite; and Reduction in risk-weighting for small and medium sized enterprises (SME). Refer to pages 195 to 215 of the 2014 ARA for more information on capital management in RBS and specifically: Overview and key developments; RWA analysis, movement tables, segmental analysis and capital resources under current rules (both PRA transitional basis and end-point CRR; Leverage exposures based on 2014 Basel III framework; and Regulatory developments. 7

10 Capital Table 2: Capital ratios As set out in the Basis of disclosures on page 3, capital and RWA analyses for 2014 are based on CRR applicable in the UK as promulgated by the PRA (PRA transitional basis) and analyses for 2013 are based on CRD III or Basel 2.5 basis. For CFG, capital resources are based on Basel I, as applied by CFG for regulatory reporting in the US and risk-weighted assets on the bases used by RBS; therefore it is not appropriate or meaningful to calculate capital ratios and hence denoted as not meaningful (n/m) below. RBS RBS plc NWB Plc UBIL CFG 2014 % % % % % CET1 (1) n/m Tier n/m Total n/m 2013 CT1 (1,2,3,4) n/m Tier n/m Total n/m Notes: (1) RBS CRR as implemented by the PRA in the UK, with effect from January (2) RBS plc, NWB Plc and UBIL on Basel 2.5 basis. (3) CFG: based on FED Band 1 which does not incorporate a Core Tier 1 (CT1) definition. The above shows value for CT1. (4) UBIL: CET1 ratio at 31 December 2014 includes verified profits to 30 September 2014 in line with COREP submission for 31 December Table 3: RWAs by risk type Credit risk RBS RBS plc NWB Plc UBIL CFG m m m m m - non-counterparty 264, ,132 61,668 22,374 62,414 - counterparty 30,379 27, Market risk 23,960 18, Operational risk 36,784 17,134 5,546 1,348 5, , ,923 68,302 24,180 68, Credit risk - non-counterparty 291, ,856 52,313 29,766 52,349 - counterparty 22,341 20, Market risk 30,242 21, Operational risk 41,809 17,473 5,642 1,450 5, , ,178 59,162 32,301 58,109 8

11 Capital Key points Refer to pages 171 and 210 to 211 of 2014 ARA for commentary. The RBS plc CET1 ratio at 31 December 2014 reflected capital of 34 billion and RWAs of 264 billion. CET1 capital increased by 6.3 billion partly due to transition to CRR and the treatment of significant investments. RWAs increased by 86 billion. The increase in RBS plc RWAs reflected: Non-counterparty credit risk increase of 81 billion predominantly due to CRR change in 2014 to significant investments and deferred tax which resulted in a threshold being applied and a proportion of significant investment and deferred tax assets now being risk weighted ( 102 billion). This was partly offset by reduction of 21 billion driven by Corporate & Institutional (CIB) and RBS Capital Resolution (RCR) risk reduction strategy. Counterparty credit risk RWA increase of 7.3 billion reflecting CRR related impact partly offset by business movements. Market risk: a net reduction of 2.5 billion reflecting increase due to CRR securitisation impact of 2 billion more than offset by bond disposals and modelled market risk movements. CET1 ratio on a PRA transitional basis for NWB Plc was strong at 13.9% and primarily reflects the impact of 1.5 billion of attributable profit as well as a RWA increase of 9.1 billion: Non-counterparty credit risk increase of 18 billion predominantly due to CRR change in 2014 to significant investments and deferred tax which resulted in a threshold being applied and a proportion of significant investment and deferred tax assets now being risk-weighted. This was partly offset by reduction of 9 billion related to portfolio reduction, SME discount, improvements in risk parameters and model changes. UBIL CET1 ratio as reported above of 17.3% shows profit generation reflecting impairment releases as well as lower RWAs due to RCR disposal strategy, an improved economic outlook and foreign currency movements in the second half of CFG RWAs increased by 10 billion due to both growth in lending and the impact of foreign currency movements. 9

12 Capital The following tables show the RWAs and minimum capital requirements of RBS and its significant subsidiaries. Table 4: Minimum capital requirements RBS RBS plc NWB Plc UBIL CFG Risk type m m m m m 2014 Credit risk - non-counterparty - advanced IRB 13,065 6,538 3,257 1,596 - standardised 8,119 9,473 1, ,993 - counterparty 2,430 2, Market risk 1,917 1, Operational risk 2,943 1, ,474 21,115 5,464 1,935 5, Credit risk - non-counterparty - advanced IRB 16,205 8,254 3,855 2,055 - standardised 7,080 1, ,188 - counterparty 1,787 1, Market risk 2,419 1, Operational risk 3,345 1, ,836 14,255 4,733 2,582 4,649 Key point As highlighted by Chart 2 (Regulatory hierarchy), data for these significant subsidiaries above do not aggregate to the overall RBS position. Trends in minimum capital requirements in Tables 5 to 8 reflect those seen in RWAs discussed on page 9. 10

13 Capital Table 5: Non-counterparty credit risk IRB minimum capital requirements RBS RBS plc NWB Plc UBIL Advanced IRB exposure class and sub-class m m m m 2014 Central governments and banks Institutions Corporates 8,180 5,039 1, Retail SMEs secured by real estate collateral 1, ,052 qualifying revolving retail other retail Equities 3, ,323 1,159 exchange-traded 45 8 private equity other Securitisation positions Non-credit obligation assets ,065 6,538 3,257 1, Central governments and banks Institutions Corporates 10,391 6,339 2, Retail SMEs secured by real estate collateral 2, ,287 qualifying revolving retail other retail , ,610 1,407 Equities exchange-traded private equity 22 5 other Securitisation positions Non-credit obligation assets ,205 8,254 3,855 2,055 Note: (1) CFG is not included as it is wholly on the Basel III standardised approach. Key point The reduction in advanced IRB related minimum capital requirements principally reflects strategic balance sheet and risk reduction in CIB and RCR (refer to Table 14 for segmental analysis). 11

14 Capital Table 6: Non-counterparty credit risk standardised (STD) minimum capital requirements RBS RBS plc (1) NWB Plc UBIL CFG Standardised exposure class m m m m m 2014 Regional governments or local authorities Administrative bodies and non-commercial undertakings 1 1 Institutions Corporates 4, ,320 Retail 1, ,119 Secured by mortgages on - commercial real estate residential property Past due items Securitisation positions Other items 765 8,420 1, ,119 9,473 1, , Regional governments or local authorities Administrative bodies and non-commercial undertakings 1 1 Institutions Covered bonds 1 Collective investment undertakings 2 Corporates 3, ,394 Retail 1, Secured by mortgages on - commercial real estate residential property Past due items Securitisation positions Other items ,080 1, ,188 Note: (1) The increase in other items exposure class reflects the impact of the CRR change to significant investments as noted in the key points on page 9. Key point The increase in standardised commercial real estate requirements reflects increased lending and the impact of foreign exchange movements in CFG. Standardised exposures for institutions within RBS plc were higher than RBS as it included RWAs relating to intra-group balances. Table 7: Counterparty credit risk requirements RBS RBS plc NWB Plc UBIL CFG 2014 m m m m m Counterparty credit risk 2,430 2, Counterparty credit risk 1,787 1,

15 Capital Table 8: Market risk trading book and other business minimum capital requirements RBS RBS plc NWB Plc UBIL 2014 m m m m Interest rate position risk requirement Equity position risk requirement 1 Option position risk requirement 7 1 Specific interest rate risk of securitisation positions Commodity position risk requirement 2 Foreign exchange position risk requirement Total (standard method) Pillar 1 model based position risk requirement 1,458 1, Total position risk requirement 1,917 1, The contributors to the Pillar 1 model based position risk requirement are: Value-at-risk (VaR) Stressed VaR Incremental risk charge (IRC) Risks not in VaR Interest rate position risk requirement Equity position risk requirement 1 1 Option position risk requirement 10 Specific interest rate risk of securitisation positions Commodity position risk requirement Foreign exchange position risk requirement Total (standard method) Pillar 1 model based position risk requirement 2,086 1, Total position risk requirement 2,419 1, The contributors to the Pillar 1 model based position risk requirement are: VaR Stressed VaR Incremental risk charge All price risk 8 7 Risks not in VaR Key points For commentary on market risk movements in RBS, refer to pages 298 to 322 in 2014 ARA. Apart from RBS plc, RBS Securities Inc (RBSSI) is the major contributor to market risk capital requirements in RBS. RBSSI market risk RWAs were 3.0 billion predominantly stressed VaR and IRC. 13

16 Capital Table 9: Capital resources 2014 (PRA transitional basis) RBS RBS plc NWB Plc UBIL CFG (1) Shareholders equity (excluding non-controlling interests) m m m m m Shareholders equity 57,246 52,553 13,312 5,081 12,339 Preference shares - equity (4,313) (1,421) Other equity instruments (784) Regulatory adjustments and deductions 52,149 51,132 13,312 5,081 12,339 Own credit 500 1,300 Defined benefit pension fund adjustment (238) (127) 320 Net unrealised available-for-sale (AFS) gains (47) Cash flow hedging reserve (1,029) (755) Deferred tax assets (1,222) (258) (742) Prudential valuation adjustments (384) (324) (1) Goodwill and other intangible assets (7,781) (917) (530) (4,513) Expected losses less impairments (1,491) (805) (785) (3) Instruments of financial sector entities where the institution has a significant investment (14,809) (2,318) Other regulatory adjustments (855) (1,217) 372 (12,500) (16,633) (3,844) (900) (3,903) CET1 capital 39,649 34,499 9,468 4,181 8,436 Additional Tier 1 (AT1) capital Qualifying instruments and related share premium subject to phase out 5,820 3, Qualifying instruments issued by subsidiaries and held by third parties 1,648 Tier 1 deductions Instruments of financial sector entities where the institution 7,468 3, has a significant investment (1,291) (140) (1,291) (140) Tier 1 capital 47,117 36,711 9,562 4,181 8,436 Qualifying Tier 2 capital Dated subordinated debt - net of amortisation 1,505 Qualifying instruments and related share premium 6,136 20,427 5, Qualifying instruments issued by subsidiaries and held by third parties 7,490 Unrealised gains on AFS equity shares 1 Collectively assessed impairment provisions 804 Tier 2 deductions Instruments of financial sector entities where the institution 13,626 20,427 5, ,310 has a significant investment (1,836) (102) Other regulatory adjustments (41) (8) (5) (1,877) (110) (5) Tier 2 capital 13,626 18,550 5, ,310 Total regulatory capital 60,743 55,261 14,832 4,704 10,746 For the note to this table refer to the following page. The treatment of significant investments in financial institutions in CRR differs from the Basel 2.5 basis for material holdings. This impacted RBS plc and NWB Plc. In Ulster Bank Group, surplus provision is allowable within Tier 2 capital as advanced IRB provisions exceeded expected loss at 31 December The regulatory capital deduction for goodwill and intangible assets in CFG relates to acquisitions made by CFG. 14

17 Capital Table 9: Capital resources continued 2013 (Basel 2.5 basis) RBS RBS plc NWB Plc UBIL CFG (1) Shareholders equity (excluding non-controlling interests) m m m m m Shareholders equity 58,742 54,322 8,531 3,840 11,604 Preference shares - equity (4,313) (1,421) Other equity instruments (979) 53,450 52,901 8,531 3,840 11,604 Non-controlling interests 473 Regulatory adjustments and deductions Own credit 726 1,519 Defined benefit pension fund adjustment 362 (119) Net unrealised AFS losses/(gains) 308 (302) (6) 55 Cash flow hedging reserve 84 (350) Goodwill and other intangible assets (12,368) (1,127) (489) (4,273) Expected losses less impairments (19) (341) (2) 50% of securitisation positions (748) (384) (11) 50% of material holdings (24,277) (2,503) Other regulatory adjustments (103) (278) 318 (11,758) (24,746) (2,350) (98) (3,563) CET1 capital 42,165 28,155 6,181 3,742 8,041 AT1 capital Preference shares - equity 4,313 1,421 Preference shares - debt 911 2, Innovative/hybrid Tier 1 securities 4,207 2,081 Tier 1 deductions 9,431 5, % of material holdings (976) (15) Tax on expected losses less impairments Other regulatory adjustments (2,781) (970) (2,781) 103 (15) Tier 1 capital 50,626 31,338 6,567 3,727 8,041 Qualifying Tier 2 capital Undated subordinated debt 2,109 3,990 2, Dated subordinated debt - net of amortisation 12,436 17,820 3, Unrealised gains on AFS equity shares Collectively assessed impairment provisions Surplus provisions 33 Tier 2 deductions 15,054 21,880 5, ,562 50% of securitisation positions (748) (384) (11) Expected losses less impairments (25) (444) (2) 50% of material holdings (976) (24,277) (2,503) (15) Other regulatory adjustments 2,781 (1,749) (21,880) (2,958) (17) Tier 2 capital 13,305 2, ,562 Supervisory deductions Unconsolidated investments (36) (29) (80) Other deductions (236) (268) (9) (272) (297) (89) Total regulatory capital 63,659 31,041 9,085 4,385 9,603 Note: (1) Based on FED Band 1 which does not incorporate a CT1 definition. The above amount shows value for CT1. 15

18 Capital Capital instruments Table 10: Capital instruments The following table details the main terms and conditions of RBS s capital instruments issued to third parties treated as Tier 1 capital under Pillar 1, or Tier 2 capital which includes an incentive for the issuer to redeem. The balances are the IFRS balance sheet carrying amounts, which may differ from the amount which the instrument contributes to regulatory capital. Regulatory balances exclude, for example, issuance costs and fair value movements, while dated capital is required to be amortised on a straight-line basis over the final five years of maturity. For accounting purposes the capital instruments in the following table are included within equity or subordinated liabilities, details of which are included on pages 414 to 420 of the 2014 ARA. Refer to Appendix 2 for more details on these instruments Pillar 1 treatment - Additional Tier 1 Step-up coupon m m RBS - undated loan capital US$762 million 7.648% perpetual regulatory 3 month US$ LIBOR plus 2.5% (callable quarterly from September 2031) RBS - debt preference shares Series F US$156 million 7.65% (callable any time from March 2007) Series H US$242 million 7.25% (callable any time from March 2004) Series L US$751 million 5.75% (callable any time from October 2009) Series 1 US$65 million 9.118% (callable any time from March 2010) Series 1 15 million 7.387% (callable any time from December 2010) NWB Plc - debt preference shares Series A 140 million 9% (not callable) Series C US$246 million % (callable quarterly from April 2002) RBS US Capital Trusts - debt trust preferred securities 391 million floating rate 2042 (callable quarterly from June 2012) 3 month EURIBOR plus 2.1% 326 US$486 million 6.8% 2042 (callable quarterly from March 2008) US$318 million floating rate 2043 (callable quarterly from July 2013) 3 month US$ LIBOR plus 1.865% 192 US$394 million 6.425% 2043 (callable quarterly from January 2034) 3 month US$ LIBOR plus % RBS N.V. US Capital Trusts - debt trust preferred securities US$1,285 million 5.90% Trust Preferred V (callable any time from July 2008) US$200 million 6.25% Trust Preferred VI (callable any time from September 2008) US$1,800 million 6.08% Trust Preferred VII (callable any time from 1,100 1,020 February 2009) RBS US Capital Trusts - equity trust preferred securities US$357 million 5.512% (redeemable September 2014) 3 month US$ LIBOR plus 1.84% US$276 million 3 month US$ LIBOR plus 0.80% (redeemable 3 month US$ LIBOR plus 1.8% September 2014) 166 million 4.243% (redeemable January 2016) 3 month EURIBOR plus 1.69% million % (redeemable June 2017) 3 month LIBOR plus 1.69% RBS - paid in equity trades CAD321 million 6.666% (callable quarterly from October 2017) 3 month CDOR plus 2.76% US$564 million 6.99% (callable quarterly from October 2017) 3 month US$ LIBOR plus 2.67%

19 Capital Table 10: Capital instruments continued Pillar 1 treatment - Additional Tier 1 continued Step-up coupon m m RBS - equity preference shares Series M US$578 million 6.4% (callable any time from September 2009) Series N US$553 million 6.35% (callable any time from June 2010) Series P US$247 million 6.25% (callable any time from December 2010) Series Q US$516 million 6.75% (callable any time from June 2011) Series R US$254 million 6.125% (callable any time from December 2011) Series S US$661 million 6.6% (callable any time from June 2012) Series T US$1,281 million 7.25% (callable any time from December 2012) Series U US$1,013 million 7.64% (callable every ten years from September 2017) 3 month US$ LIBOR plus 2.32% Series 1 1,250 million 5.5% (callable quarterly from December 2009) Series million 5.25% (callable quarterly from June 2010) Series million % (callable quarterly from September 2017) 3 month EURIBOR plus 2.33% Series 1 54 million floating rate notes (callable quarterly from October 2012) 3 month LIBOR plus 2.33% Tier 2 capital securities which contain an incentive for the issuer to redeem Pillar 1 treatment - Tier 2 RBS plc - undated loan capital 1 million floating rate undated subordinated notes 6 month LIBOR plus 0.75% 1 (callable semi-annually from March 2011) 176 million 5.125% undated subordinated notes 3 month EURIBOR plus 1.65% 153 (callable quarterly from July 2014) 170 million floating rate undated subordinated notes 3 month EURIBOR plus 1.60% 141 (callable quarterly from July 2014) 56 million 6% undated subordinated notes Aggregate of 1.85% and the 59 (callable every five years from September 2014) 5 year UK Gilts yield 54 million 5.125% undated subordinated notes Aggregate of 1.95% and the (callable every five years from March 2016) 5 year UK Gilts yield CAD474 million 5.37% undated subordinated notes 3 month CDOR plus 1.48% (callable quarterly from May 2016) 51 million floating rate undated subordinated notes Aggregate of 2.35% and the (callable every five years from December 2012) 5 year UK Gilts yield 103 million 9.5% undated subordinated bonds 9.5% or the 5 year UK Gilts (callable every five years from August 2018) yield plus 2.375% 35 million 5.5% undated subordinated notes Aggregate of 1.84% and the (callable every five years from December 2019) 5 year UK Gilts yield 21 million 6.2% undated subordinated notes Aggregate of 2.05% and the (callable every five years from March 2022) 5 year UK Gilts yield 16 million 5.625% undated subordinated notes Aggregate of 2.10% and the (callable every five years from September 2026) 5 year UK Gilts yield 19 million 5.625% undated subordinated notes Aggregate of 2.41% and the (callable every five years from June 2032) 5 year UK Gilts yield NatWest Plc - undated loan capital 10 million floating rate undated step-up notes 3 month EURIBOR plus 2.15% 8 9 (callable quarterly from October 2009) 178 million floating rate undated subordinated notes 3 month EURIBOR plus 2.15% (callable quarterly from October 2009) 87 million floating undated subordinated step-up notes 5 year UK Gilts yield plus 2.98% (callable every five years from January 2010) 53 million 7.125% undated subordinated step-up notes 5 year UK Gilts yield plus 3.08% (callable every five years from October 2022) 17

20 Capital Table 10: Capital instruments continued Tier 2 capital securities which contain an incentive for the issuer to redeem continued Step-up coupon m m RBS plc - dated loan capital AUD36 million floating rate subordinated notes month BBSW plus 0.78% (callable quarterly from February 2012) CAD217 million floating rate subordinated notes month CDOR plus 0.72% 123 (callable quarterly from March 2010) US$686 million floating rate subordinated notes month US$ LIBOR plus 0.7% 415 (callable quarterly from April 2011) US$229 million floating rate subordinated notes month US$ LIBOR plus 0.78% 139 (callable quarterly from October 2011) 227 million floating rate subordinated notes month EURIBOR plus 0.85% 189 (callable quarterly from January 2011) 23 million floating rate subordinated notes month EURIBOR plus 0.75% (callable quarterly from January 2012) AUD265 million floating rate subordinated notes month BBSW plus 0.87% 144 (callable quarterly from October 2009) AUD397 million floating rate subordinated notes month BBSW plus 0.87% 216 (callable quarterly from October 2009) AUD18 million floating rate subordinated notes month BBSW plus 0.78% 9 27 (callable quarterly from February 2012) US$238 million floating rate subordinated 3 month US$ LIBOR plus 0.7% step-up notes 2017 (callable quarterly from August 2012) CHF34 million floating rate subordinated notes month CHF LIBOR plus 0.62% 23 (callable quarterly from December 2012) 1,000 million 4.625% subordinated notes month EURIBOR plus 1.3% (callable quarterly from September 2016) US$322 million floating rate Bermudan callable 3 month US$ LIBOR plus 0.74% 195 subordinated notes 2015 (callable quarterly from September 2010) First Active plc - dated loan capital 60 million floating rate subordinated bonds month LIBOR plus 2.54% 60 (callable quarterly from April 2013) RBS N.V. - dated loan capital 5 million floating rate Bermudan callable subordinated notes month EURIBOR plus 1.5% 4 4 (callable quarterly from October 2010) AUD26 million floating rate Bermudan callable subordinated notes month BBSW plus 0.79% (callable quarterly from May 2013) AUD123 million floating rate Bermudan callable subordinated notes month BBSW plus 0.79% (callable quarterly from May 2013) $564 million ( US$1,500 million) floating rate Bermudan 3 month US$ LIBOR plus 0.7% subordinated notes 2015 (callable quarterly from March 2010, partial redemption 2013) 415 million (2012-1,500 million) floating rate Bermudan 3 month EURIBOR plus 0.75% subordinated notes 2015 (callable quarterly from June 2010, partial redemption 2013) 18

21 Credit risk Credit risk is the risk of financial loss owing to the failure of a customer or counterparty to meet its obligation to settle outstanding amounts. RBS is exposed to credit risk as a result of a wide range of business activities. The most significant source of credit risk is lending. The second most significant source is counterparty credit risk, which results from activities in the derivatives and security financing transaction markets. The credit risk management framework addresses not only credit risk but also concentration risk, settlement risk, issuer risk, wrong-way risk and credit mitigation risk. Credit risk management Information on how RBS manages credit risk and additional credit risk disclosures are set out on pages 232 to 273 and 274 to 297 of the 2014 ARA. Measurement of credit RWAs under Basel III RBS has been granted permission by the PRA to use the IRB approach to calculate RWAs for the majority of its credit risk exposures. This approach allows RBS to use its own models to estimate PD, LGD and exposure at default (EAD) as inputs to the regulatory formula that determines RWAs. In the case of project finance and income-producing real estate, the supervisory slotting approach rather than internally modelled estimates is used to determine RWAs. For some portfolios, primarily in Private Banking and CFG, RBS applies the STD approach. Exposures are allocated to exposure classes in accordance with the regulatory requirements. Under this approach, RBS uses credit ratings from external rating agencies (Standard & Poor s (S&P), Moody s and Fitch) to assign exposures to corporates, sovereigns and financial institutions to credit quality steps, as defined by the regulation. Refer to Table 14 for an analysis of approach by segment. Credit risk models RBS uses credit risk models to support risk assessments in the credit approval process, ongoing credit risk management, monitoring and reporting, as well as the calculation of RWAs. Probability of default/customer credit grade models PD models assess the probability of a customer failing to honour its credit obligations over a one year period. Wholesale models As part of the credit assessment process, RBS assigns each customer a credit grade reflecting its PD. RBS maintains and uses a number of credit grading models which consider risk characteristics relevant to the customer, incorporating both quantitative and qualitative inputs. RBS uses these credit grades in many of its risk management and measurement frameworks, including credit sanctioning and managing single name concentration risk. Different models are developed for different customer types. The most material models (those used for the largest aggregate amounts of exposure) are those applied to large and mid-corporate customers and bank and sovereign counterparties. In addition, a number of less material models are used, including those for non-bank financial institutions, public sector entities and specialist corporate sectors such as shipping. Regulation defines the minimum time series and other attributes of the data used for developing and calibrating models. For the most material models, external data are referenced for calibration purposes (historical default data from rating agencies and insolvency rates) so that models are calibrated to in excess of 20 years of default experience. Most of the less material models relate to portfolios for which default frequency is low because customer loan volumes are lower and borrowers are of higher credit quality. In these cases, as required by regulation, a specific approach is applied to produce an appropriately prudent calibration to reflect the potential that future outcomes differ from the very low risk outcomes historically observed. Retail models RBS assigns each customer account a score, which is a typical input into the model used to assign a PD. Account scoring is used extensively across the businesses to support decision making and portfolio management. Models are developed using a range of data across portfolios, including customer and account data as well as data from credit bureaux. Bespoke models are developed for different product types, with further distinctions based on other criteria, such as whether or not a customer also has a current account with RBS. All retail PD models produce both a best estimate measure, which is used for portfolio reporting and forecasting, and a conservative measure, which is required as input to the RWA and provision calculations. The conservative measure is designed to be a PD that takes account of the normal volatility observed in actual default rates. PDs are calibrated quarterly to ensure that they continue to reflect the actual underlying portfolio performance. Exposure at default models EAD models provide estimates of utilisation of a credit facility at the time of a customer's default, recognising that customers may make further drawings on unused credit facilities prior to default. Regulation requires that EAD is always equal to or higher than current utilisation. Exposure can be reduced by a netting agreement, subject to meeting standards of legal enforceability. Different wholesale and retail models are developed for different product types. Models are developed using internal data as stipulated by regulatory requirements. The models with greatest impact on EAD are those applying to revolving products (such as revolving credit facilities granted to wholesale customers, credit cards provided to retail customers or overdraft facilities provided to all customer types). For these products, historical data on limit utilisation in the period prior to customer default are used to estimate and calibrate the models. In line with regulatory requirements, the model estimates reflect downturn conditions. 19